Table of Content. Introduction. Literature Review. Methodology and Hypothesis. Analysis and Findings. Conclusion and Policy Implication

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1 Does Japan Allocate its Foreign Aid towards Economic Relation? Relationship between Foreign Aid and FDI Graduate School of Public Policy, The University of Tokyo Ahmad Nazmi Kamal Adzham Table of Content Introduction Literature Review Methodology and Hypothesis Analysis and Findings Conclusion and Policy Implication

2 Introduction 1954 Japan joined the Colombo Plan on October 6, Foreign aid and technical assistance for the economic and social development of the South and Southeast Asia region. For war reparation negotiations and economic cooperation with the Asian nations that Japan had occupied during the World War II s Secure a steady supply of energy and other resources following the break of 1973 oil crisis Introduction s cont... essential instrument to protect diplomatic interests with resource-rich countries outside of Asia s building economic and political relation mainly among Asian countries. Ministry of International Trade and Industry (MITI) wanted to use aid to restructure Japan s FDI and trade relations with Southeast Asia Ministry of Foreign Affairs (MOFA), on the other hand, wanted to use aid as a diplomatic lever

3 Introduction Table 1: Typology of foreign aid by DAC members Size % of GNI > <0.3 Humanitarianism Denmark, Sweden, Finland, Switzerland, Norway, Netherland Germany, Ireland Ex-colony Belgium, United France Management Kingdom Australia, Portugal Economic Relation Canada, Austria Italy, Greece, Spain, New Zealand, Japan National Security United States Source: Bokyeong Park from Korea Institute for International Economic Policy, Korea and Hong Sik Lee from Inha University, Korea in their Working Paper Series Vol for the The International Centre for the Study of East Asian Development, Kitakyushu Introduction Graph 1: Japan s Aid Allocation to ASEAN (% of Total Aid) Source: OECD DAC,

4 Introduction Graph 2: Japan s 2009 Aid Allocation by Region and Income (%) Source: OECD DAC, Literature Review Burnside and Dollar (2000) aid does not promote growth. aid allocate to sound governance country does promote growth. Alesina and Dollar (2000) political and strategic consideration plays an important part in foreign aid allocation pattern. political allies and colonial ties does play a significant role in aid pattern enforceability of contracts and openness are also important

5 Literature Review Hidemi Kimura and Yasuyuki Todo (2007) robust evidence that foreign aid from Japan has a vanguard effect. Gastanaga et al. (1998) uses policy and institutional variables lower corruption and nationalisation risk levels, and better contract enforcement are associated with higher FDI inflows. Jun and Singh (1996) higher political risk attract less FDI. Methodology and Hypothesis To analyze whether foreign aid works through the trade and investment link it is necessary to show that Foreign aid promotes economic development, and Economic development promotes trade and investment. Therefore, the hypothesis is as below: H1: Foreign aid promotes foreign direct investment (FDI) inflows.

6 Analysis and Findings Graph 3: Japanese Foreign Aid & FDI to ASEAN (USD million) Source: OECD, World databank, World Development Indicators (WDI), Asian Development Bank (ADB), Key Economic Indicators Analysis and Findings Establishment of the ASEAN Promotion Centre on Trade, Investment and Tourism in 1981Foreign aid promotes economic development promoting exports from ASEAN member countries to Japan, particularly semi-processed and manufactured products. promote foreign investment from Japan Jointly funded by contributions from Japan (90%) and ASEAN member countries (10%) Headquarters in Tokyo

7 Analysis and Findings Graph 4: Control of Corruption: Percentile Rank Source: World databank, World Governance Indicators (WGI) Analysis and Findings Graph 5: Government Effectiveness: Percentile Rank Source: World databank, World Governance Indicators (WGI)

8 Analysis and Findings Graph 6: Regulatory Quality: Percentile Rank Source: World databank, World Governance Indicators (WGI) Analysis and Findings Have made tremendous effort in promoting government effectiveness and regulatory quality by the CMLV countries in recent years. Vietnam s Ministry of Planning and Investment (MPI) has committed to strengthen the attention to capacity development in the public sector. proposed to enhance public services and regulatory effectiveness

9 Other Factors: Aid help improves Education Environment Graph 7: School enrolment, Secondary (% gross) Source: World databank, World Development Indicators (WDI) Investment and Trade Policies: Determinants of FDI Graph 8: Cost to start a business (% of income per capita) Source: World databank, Doing Business

10 Investment and Trade Policies: Determinants of FDI Graph 9: Ease of doing business index (1=easiest to 183=most difficult) Source: World databank, Doing Business Investment and Trade Policies: Determinants of FDI Graph 10: Logistics performance index: Overall (1=low to 5=high) Source: World databank, World Development Indicators (WDI)

11 Trade Pattern Graph 11: Trade Openness (Export + Import, % GDP) Source: Asian Development Bank (ADB), Key Economic Indicators Japan-ASEAN Economic Relations Table 2: Japan s bilateral agreement FTAs in force Year Participants Japan-ASEAN Economic Partnership Agreements (EPAs) signed in 1 April 2008 ASEAN Japan- Brunei Darussalam Brunei signed in 2007 Economic Partnership Agreement Japan-Indonesia Economic Indonesia signed in 2008 Partnership Agreement Japan-Malaysia Economic Malaysia signed in 2005 Partnership Agreement Japan-Philippines Economic Philippines signed in 2006 Partnership Agreement Japan-Thailand Economic Thailand signed in 2007 Partnership Agreement Japan-Singapore Economic Singapore signed in 2002 Partnership Agreement Japan-Viet Nam Economic Partnership Agreement signed in 2009 Vietnam Source: Japan Ministry of Foreign Affairs (MOFA)

12 Conclusion Japan s foreign aid has been directed more towards building political and economic relation. Political and strategic consideration plays an important part in foreign aid allocation pattern. Japan s foreign aid also has been allocated mainly towards infrastructure and building trade capacity. Infrastructure and trade facilitation have helped in promoting trade and FDI between both donor and recipient country. Government policies, perceptions of corruption, trade barriers, and political institution play an important role in attracting FDI. Conclusion Favourable labour markets in the form of relatively low wages and an educated workforce can also be very attractive to foreign corporations.

13 Limitation and Recommendation Percentage of ODA disbursement over commitment range from 45% to 90%. The data imply that the total aid committed by a particular donor differ from the actually total aid disbursement. Establishment of an alternative agency run by the recipient country. Diffusion of economic situation and political environment of recipient country. Diffusion of business rules and standards specific. Stronger partnerships between the donor countries with the private sector Limitation and Recommendation Strong cooperation between donors and recipients country also could help improve the disbursement.. Monitoring and monthly or quarterly meetings between donor and recipient country.